The world economy is getting so choppy that even the Reserve Bank of Australia is dropping its interest-rate accelerator to neutral.
Australia’s central bank, led by governor Glenn Stevens, is on the forefront of changes in trade patterns because the economy it manages is so exposed to Asia -- the nexus of global economic growth -- and international commodity prices.
“A bellwether for the global growth pulse, former governor Ian Macfarlane was fond of saying that the single most important indicator for the RBA was global growth,” Su-Lin Ong, a Sydney-based economist at the Royal Bank of Canada, said in a report last week. “If the slowdown in the U.S. and global growth momentum intensifies or become more protracted, Australia will quickly feel the repercussions.”
The RBA on Tuesday elaborated on what it sees on the horizon: trouble.
“The global activity data had been somewhat softer and downside risks to the international economy had become a little more prominent over the past month, especially in the case of sovereign debt problems in Europe,” the RBA said in the minutes of its June 7 policy meeting, where officials opted to leave the benchmark rate unchanged. “Members judged that it would be prudent to leave the stance of policy unchanged, pending further data on international developments and on the strength of domestic demand and inflationary pressures.”
Not unlike Bank of Canada Governor Mark Carney, Mr. Stevens is holding interest rates at current levels even though inflation is hot enough to warrant higher borrowing costs in other circumstances.
“The RBA is not responding in its usual way to its own growth and underlying (consumer price index) forecasts,” Barclays Capital analysts Gavin Stacey and Joaquin Vespignani said in a report. Usually, Australian policy makers are guided by their nine-month forecasts for underlying CPI. The central bank’s current outlook is around 3 per cent, which would “typically be expected to force the RBA into action,” the Barclays economists said.
Mr. Stevens burnished the RBA’s credentials as a bellwether by becoming the first central bank from a country in the Group of 20 to raise interest rates after the financial crisis, lifting the cash rate in October, 2009. There was plenty of gloom at the time, but Mr. Stevens saw something that others didn’t. “It is only with hindsight and subsequent data that it became clear that the U.S. emerged from recession in (the third quarter of 2009) while the Asian recovery, greased by global liquidity and ultra-loose financial conditions, had been underway since early 2009,” Ms. Ong said.
Australia’s benchmark rate is 4.75 per cent compared with 1 per cent in Canada.
Because Mr. Stevens has increased interest rates so much faster than his peers, he has a comfort zone in which to assess the global economy without worrying too much about inflation pressures. Yet those pressures exist. Australia’s terms of trade are at historic levels, and economists anticipate a surge in business investment by the profit-rich resource industry. The country also is approaching full employment.
RBC predicts at least one quarter-point increase in the cash rate this year.
“If we are wrong and the RBA stays on the sidelines in the coming months or for the whole of 2011, it is likely that the U.S. and global activity outlook has deteriorated, and European concerns have intensified,” Ms. Ong said.
